CFTC Mandatory Clearing Rules – June 10 Phase-in Date For Financial Entities

Keywords: CFTC, clearing rules, phase-in date, financial entities, Category 2

The next milestone date in the Commodity Futures Trading Commission's ("CFTC's") phase-in of mandatory clearing occurs on June 10, 2013, when so-called "Category 2 entities" must begin clearing swaps subject to the mandate. Securitization vehicles, insurers, investment funds and non-swap dealer financial institutions will generally be Category 2 entities. The effect of the June 10 phase-in on the operations of securitization vehicles, in particular, is unclear.

To whom does the June 10, 2013 compliance date for mandatory clearing apply?

Category 2 Entities are commodity pools,1 private funds (as defined in Section 202(a) of the Investment Advisers Act of 1940) other than "active funds" and persons predominantly engaged in activities that are in the business of banking, or in activities that are financial in nature (as defined in Section 4(k) of the Bank Holding Company Act of 1956), but do not include third-party subaccounts or ERISA plans. The June 10 compliance date applies to swaps subject to the clearing mandate that are entered into on or after that date and are between a Category 2 entity and a Category 1 entity (i.e., a swap dealer, major swap participant or private investment fund that is "active" in the swap market),2 another Category 2 entity or any other entity that desires to clear the transaction.3

What are the criteria for determining whether an entity is predominantly engaged in activities that are in the business of banking or financial in nature?

The CFTC has stated that it is not inclined to interpret Section 4(k) of the Bank Holding Company Act or the term "business of banking" because the provisions are within the jurisdiction of, and therefore subject to interpretation by, other U.S. regulators.4 The Board of Governors of the Federal Reserve System has issued a final rule5 regarding the criteria for determining whether an entity is predominantly engaged in activities that are financial in nature as defined in Section 4(k) of the Bank Holding Company Act for purposes of Title I of the Dodd-Frank Act, which establishes the Board's authority to regulate significant nonbank financial companies.

The Board's rule includes an Appendix that lists such financial activities, and generally excludes from the definitions of the covered activities any conditions imposed for reasons of safety and soundness or for compliance with other provisions of law. The enumerated activities include lending, insurance, investment advisory services, issuing or selling instruments representing interests in pools of assets...